HFAC1321 - Financial Accounting Reporting Assignment

Assignment Task

Question

1. Describe/define the following terms in no more than 2 sentences:

• Trade payables or creditors. 
• Purchases.
• Credit customers of a business. 
• ournal in which all credit sales are recorded.

2. Why would a business sell on credit? By allowing customers (trade receivables of a company) to buy on credit, the business hopes to increase its sales.

By allowing the customer to buy on credit the business is providing the customer with a zero-interest loan to buy the inventory.

Businesses would normally put credit terms in place to allow for a 30-to-60-day interestfree period, of which interest on these sales will be charged for amounts still outstanding after the 30 / 60 days since purchase.

A customer would rather buy at a place where he or she can “borrow money” (buy on credit) for free than at a place where he or she must pay cash. In this way, the customer can use their cash for other investments (for example, earn interest at a bank). Customers who often purchase during a month or have inventory delivered to various stores or factories but have the payment made by a head office would find it more efficient to buy on credit. Increasingly, customers do not carry around large amounts of cash − electronic transfers and credit sales are the reality of many businesses.

Required

• Explain, by referring to the definitions of the elements of the financial statements, why trade receivables would classify as an asset. Include in your answer: - The definition of an asset; - Apply the information given to the definition; and - Conclude your answer. 
• List two advantages of allowing customers to purchase on credit. Give a brief explanation of each advantage listed.

3. Fizz Bong (Pty) Ltd is a company registered in South Africa with a February year-end. Their business focuses on selling non-alcoholic fizzy drinks to entertainment industries to help promote sobriety in a fun way.

Required

• Calculate the total cost of the purchases made from Blue Bubble (Pty) Ltd on 02 February 2023. 
• Prepare the general ledger account for Fizz Bong (Pty) Ltd’s trade payables for February 2023. The account must be closed off at the end of the month. 
• Prepare an extract from the Statement of Financial Position, showing the balance of trade payables, of Fizz Bong (Pty) Ltd for the financial year ending 28 February 2023.

4. The success of a business is measured by the capacity of management to invest in assets that generate the highest return for the owners. If these investments are not managed carefully, the result may be the failure and bankruptcy of the business.

The risks of investing in working capital (such as trade debtors failing to pay) must be balanced by the return of such an investment (more sales, and interest income). Risks can result from an over- or an under-investment in net working capital.

Managers need to plan their cash cycles carefully before buying goods on credit to make sure that there will be enough cash available to pay their suppliers when the debt falls due. When planning how much inventory to purchase, it is important that there is a match between the inflow of cash flows from selling the inventory and the payments to be made to the suppliers for the inventory.

Requried

• Indicate how you would calculate net working capital.
• List two risks involved when the investment in net working capital of a company is too high (there are too many current assets). 
• List two risks involved when the investment in net working capital of a company is too low (there are too few current assets).

5. “PPE”. What does this term mean? The first important meaning attached to this term is that property, plant and equipment consist of tangible assets. In order to satisfy the definition of property, plant and equipment, an item must first meet the definition of an asset.

Define the following terms and give an example of each:

• Tangible asset 
• Intangible asset 

Define the following terms:

• FOB shipping point and FOB destination point
• Depreciation 
• Depreciation Date 
• Residual Value
• Carrying Value

6. You ordered a machine for your business on 15 October 2020 from American Machines (Pty) Ltd, a supplier situated in the USA. The following information in relation to the machine purchased has been provided:

• The machine was shipped, FOB shipping point, on 1 November 2020 and the purchase price of $50 000 was paid in full on the same day.
• The shipment arrived in Cape Town harbor on 1 December 2020.
• On 5 December 2020, your business paid R20 000 for transportation fees to have the machine delivered to your factory premises.
• On 13 December 2020, your company paid R15 000 for special services acquired from an engineering company on to install the machine.
• On 2 January 2021, additional equipment had to be purchased to install the machine on the right platform for it to work as initially intended. Your business paid R140 000 for this additional equipment.
• The machine was finally ready to be used on 1 February 2021.

Required

• Calculate the initial cost price at which the machine should be recognised.
• Prepare the general journal entries to account for all the transactions that took place from the date that the order was placed on 15 October 2020, up until 1 February 2021. Include dates when preparing the general journal entries.
• Assume “Option A” was selected as the preferred depreciation method. Assume that the cost price of the machine is R930 000 and that the machine was ready to be used on 1 February 2021. Prepare the Accumulated depreciation general ledger account of machinery for the 2021 and 2022 financial years. The account must be closed off at the end of each year.
•  Assume that the cost price of the machine is R930 000 and that the machine was ready to be used on 1 February 2021. Calculated the depreciation for the 2021 and 2022 financial years using:

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